If the Fed's monetary policy causes a substantial increase in interest rates, what is the most likely impact on velocity?

Question

Quizplus · Accepted Answer

When the Fed's monetary policy causes a substantial increase in interest rates, it generally makes holding money less attractive because the opportunity cost of holding money (instead of investing it at the higher interest rates) increases. This can lead to more rapid spending or investment of money, thereby increasing the velocity of money, which is the rate at which money circulates in the economy.

If the Fed's Monetary Policy Causes a Substantial Increase in Interest